Lotus's Credit Curve: One Market for Every Risk Level, Built So Agents Can Shop It

The new core for the next era of finance.

David, welcome to StableAxe Live. Good to see you. Great to see you guys. How are we doing? We are doing pumped pumped to nerd out about on chain credit, what you're building, and Hell, yeah. All of the above all of the above. Tell us a little bit about yourself and and what you're building with Lotus. Yeah. So I am

maybe not an OG, OG crypto guy, but I I kinda got my start working in the industry in late twenty twenty. I started at Exodus Wallet right when they were doing it was at the time the largest reggae, I believe, in history, $75,000,000 reggae. And when I started there, it was still on its way to kinda scaling. Right? So there's 60 or 70 people. So I was wearing a lot of different hats. I actually started out in finance with them, but we didn't have, like, a real product team yet.

And analytics and all that stuff was still kinda getting built out. So I got very involved with their exchange product and asset integrations and staking and kinda realized, hey. I actually like this a lot more than kinda bean count, you know, as much as I like finance. And I seem to have a bit of a talent for it, and so I started leading the product side and and some of the engineering side on exchange, which is doing, you know, most of their business.

And then and then had a chance to build some really great staking products like Solana staking and partial east staking. And then got to play around with a whole bunch of different networks, you know, all the EVM stuff, but also, you know, some of our RIP, you know, Tendermint, you know, some of these different chain families that that were out there.

And so with Exodus, a lot of opportunities to to kinda play around in a bunch of different areas, do a lot of different kinda cool partnerships with, you know, Ledger and Magic Eaton. And then we started getting into a little bit of new territory product wise that I probably wasn't quite as well suited for, wasn't as interested in. And at the time, I had just I got to know my current cofounder, Bill, who was kinda leading things at Index Cooperative. So Index Cooperative, another OG protocol known for Yeah.

For its composite products. So, like, DeFi Pulse Index was kind of the flagship, best known product that that they were operating. And, you know, I think that was a case of probably right thesis probably five, six, seven years too early. And now we're starting to see different ways of these composites coming together. We're seeing reserve protocol kinda taking a different run at it using a little bit newer technology.

But at Index Coupe, Bill brought me in to be the head of product there, kinda try and get get some things turned around, kill some product lines, kinda promote some product lines. And what we found was the leverage tokens that IndexCoop offers, which basically give you you know, you want two x exposure to Bitcoin, two x exposure to ETH, three x exposure to ETH. Those tokens will go out, and they will basically draw from these money markets like an Aave or from a Morpho.

And then they create a recursive position that gives you that that two x, three x leverage. And me me me being a product guy, right, I wanted to do 15 x leverage tokens, 20 x leverage tokens, then really build something that could kinda go out and compete to win back some of that business from the perps complex.

And that's kinda where we got stopped out, and then what kinda led to the development of Lotus. So how would you describe Lotus? I mean, because I'm looking at your website right now. Your capital never sits idle. Earn a base rate when nobody's borrowing. You have some very impressive design partners. I'm seeing, you know, Index Co op, Bitwise, FalconX, MLN eleven Credit. Like, what is the right paradigm to start thinking about what you're building at Lotus?

And, like, what does one credit market for every level of risk actually mean?

Yeah. That's a great question. So when I think about what we're doing with our first, you know, our first two core markets that we're launching are are kind of the biggest markets for loan origination and on chain, And that is Bitcoin and and ETH. And those are just our first two launch markets. Right? We pick those because that's where we feel we can kind of go out, earn the proof that the protocol works as intended. So when you're looking at the website, you see that that kind of psychedelic graphic up at the top.

Super cool graphic, by the way. Yeah. Thanks. And if you you you kind of play around with that, kind of pull it around, that can that's one way of kind of thinking about the structure of one of our markets. So tranche one would be, you know, kind of in traditional finance parlance, would be like your most senior tranche in a kind of a traditional tranching architecture. Now we use the term tranche because it's sort of familiar nomenclature, but what we're doing isn't actually pure tranching.

We can get into that a little bit more. But really what we're kinda saying is, hey, if you're a depositor or a a lender, and if you kinda drag that out to those kinda that outer rim there, now you're looking at a 94 and a half percent liquidation loan to value. So you're, you know, you're pretty close to a 20 x leverage on that position. And so if you're a lender out there, you might be getting a really great really great borrow rate. But locally, demand for leverage can be kinda lumpy or spotty. You know?

It can kind of come in bursts. So when the market's doing really well, you get others, you know, better than anybody. You'll see leverage rise. And then it'll be just the opposite. And then we'll see periods of six months where, you know, all of sudden, Athena's turning into a a money market product more than a basis trade product. Right? And so the central idea is that if you're that lender out there, you have a million dollars of capital, you're earning a great rate on $500,000 of that capital.

We just say, hey, we're gonna take the other $500,000 and we're going to cascade that down to the next riskiest level in the market to be able to meet borrowing demand that is local there or may even be coming from even more senior zones of the market.

And sort of the idea with that is that as a lender, you're able to keep your money in that market, or you're able to stay in the vaults that are depositing in that market because the capital is being efficiently utilized across the curve while preserving those isolated risk boundaries at these different points in the market. Now the the other primitive. So we we kinda call cascading supply.

That's a a new financial primitive, we believe, that we think has, you know, much bigger implications than just what we can solve on chain today. But at the the other end of the spectrum of one of our markets, the most most senior, so kind of that very middle of that that spiral that you were looking at. Write this down for us. Okay. So we already we kinda looked at that spiral. And this is this is another way of of kinda thinking about that.

You know, the the psychedelic spiral is kinda fun, and it's it's a way to kinda get familiar. But what we're looking at here looks a lot like a duration risk curve like in the bond market, right, in terms of, you know, you you you could be looking at the most senior zone, this flat zone, and that could kinda be where you've got your one month, three month kind of treasuries, and they all have a pretty homogenous rate. You know? It's all pretty close.

But then as you start getting further and further out, you know, maybe at the tail end of this curve, that's where you see your your twenty year duration treasuries where you have that extra that kind of interest rate risk from inflation and from, you know, all the uncertainty that goes with that kind of a duration.

So now if we kinda take that same concept, but we think about the money markets that are on chain today, imagine this is a a Bitcoin cash market where you're depositing Bitcoin collateral, and you're able to borrow USDC against that. Now we talked about cascading supply, so you can kinda see that mechanism. So, again, this would be the example. This furthest point out here to the right, that would be the most junior zone of this particular market.

And that could be commensurate with, like, 20 x leverage if you were to run a long funding leg of a basis trade, a delta neutral trade, or maybe you're just doing a directional trade, but you wanna be able to do that more capital efficiently or cost efficiently than doing that with perps. So that's some of the reasons that people are borrowing and trading further out in that zone, but it all is kinda made possible by that cascading liquidity.

Otherwise, what you end up with is we have all these points in this market, but then they all start to look like an isolated morpho market or an isolated oiler market or so on and so forth. And we like the isolation. You know, we like the single asset, collateral asset, single debt asset. That structure makes it much more underridable at a market level than something like what we saw with Abe and RSE and sort of having this pooled model.

So the isolated market model is definitely an improvement in our view, but it suffered from fragmented liquidity, you know. Or if you're kind of looking at, you know, any one of these plot points, imagine you have a collateral asset that is kind of fluctuating in its risk level over time. It could be some newer RWA that has exposure to a private credit portfolio. It could just be a more volatile digital asset.

And so when a morpho market gets set, it gets set with these immutable parameters where there's a fixed liquidation loan to value, so on and so forth. And that might not be appropriate over time. You know, a financing package and a loan changes state over time. It's not just the rate when you you kinda go and pick it. Right?

So that's why it's really important to us for our markets and for our interest rates and for our lenders and borrowers to kind of be able to pick the right spot on the curve for their financing needs or what they're trying to you know, if it's a vault that's trying to achieve a certain mandate to be able to allocate there, but then to be able to refinance as conditions change.

So What you David, just thinking about the if we contextualize this a little bit in terms of who is getting involved Yeah. My you know, this isn't a product, at least for me personally, given my, like, own trading journey, is something that, like, fully makes sense in terms of how I would use it or how I would leverage something like this.

Do you see this as being something that would be extremely valuable to like, I'd imagine very sophisticated institutional traders who are are very familiar with this type of stuff and, you know, unlocking functionality and unlocking utility for more of that, like, maybe original Exodus wallet user who's like more, you know, more retail, more elementary in terms of their understanding. Is there ways to expose the benefits of this cascading system to in a responsible way to someone like Yes. Like myself?

Like what does that look like?

Yeah. That's such a great question, man. And and tying it back, for me, it's easy to think about those those excess customers, right, where you have about a million of them who are active every month. And there's some very different groupings within that that category of of retail who's in a in a wallet.

But if I were to kind of explain this to, you know, let's let's think about the the users that we expect day one and who are kind of our pareto of, you know, usage and capital that's moving in and off of the platform. Initially, that will be largely kind of professional funds, on on chain funds mostly, folks who are doing things on chain already. So think of a a Dialectic or a Fastenara. Bitwise has their liquid fund that they're they're kind of booting up, RE7.

Many of the bigger vault managers who you see curating on on some of our favorite platforms, they're also doing some interesting things with a sort of structured vaults that involve some borrowing strategies, this, that, and the other thing. So those are all very important sort of day one and really even before day one customers for us. So one goal and and one thing that we have to have happen is at the time that we go live, so we'll have about a three week sort of pre deposit period.

And the goal of that is to kind of aggregate everything into a vault that we call LotusOne. And then LotusOne brings in a certain amount of capital that can then be reallocated out to our individual risk managers who have their own mandates with their vaults, and that money matriculates down into our markets where it can then start being borrowed by the other side of that, which is your rate sensitive, capital efficiency sensitive borrower on chain. And that is mostly institutional.

It's mostly funds rather than sort of your marginal me or you guys who are going in there to, you know, maybe borrow a $100,000. We want all of those folks, and we we think we built Really, I think it's it's it's probably the best app in DeFi in terms of usefulness and UI UX and design. So we put a lot into that. At the same time, we know that's it's challenging, right, to get that next user in right now when retail's just kinda still sidelined a bit. So that's our initial focus.

But hey, we're we're ultimately the product that we're forming is a credit network and marketplace. And to be able to do that and to be able to have markets that have really persistent utilization. Right? And utilization is really what drives those organic rates that then power the vaults, and the vaults are the thing that everybody wants access to. Everybody wants vaults, and everybody wants yield, but they want it to be safe. They wanna be able to understand it.

And the the tricky part now is generating the yield to service those vaults in a way that actually creates you know, it's real demand. It's real product usage. Yeah. It's sustainable. Right? And so some of our goals Lotus is uniquely set up to serve certain categories of particulars any kind of secured lending.

And so one that I think about when I'm kinda looking eighteen months from now, we have this massive confluence of stablecoin growth, tokenized asset growth, and then tokenized equities, which are gonna bring this whole host of, frankly, much higher quality assets on chain with with real cash flows, you know, real businesses behind them.

And when we kinda think about a marketplace that looks like that and some of the customers that we can serve, it's bringing our kind of our market structure to, you know, imagine Interactive Brokers or Alpaca a Markets. Right? And being able to serve this up as portfolio margin technology and infrastructure that they can use because you can do some really interesting things where, you know, same customer, same overall kind of portfolio scoring, but you can offer them different levels of portfolio margin based on

heterogeneous rates. It would be really great to see the market map or the, like, fund or, like, the yield flow or the yield I don't even know how how I would say that, but, like, it seems to me that Lotus is playing a pretty pivotal role and potentially massive role in, you know, this sort of network effect of how yield works and compounds and credit and how the credit marketplace really works.

It would be great to see, yeah, some of those, like, traditional systems and also this new this new guard of folks who are coming in to reimagine it and how you even mentally map that out. That would be really I don't know if you've you you may have that on a whiteboard somewhere

on a on a internal doc, but I would I would love to see that. It's it's me and my my college dropout, goodwill hunting, financial engineer, Anthony. We just got the the mind together. No. We we do have some of those things. I wish I had it a little bit more prepared, but there is one thing that I I could share

if you guys don't mind that she Yeah. Yeah. This is nice. We just shipped Fast. Guest sharing capabilities. Share. Which is This is making me happy that this is just working now. Funny because we've never had a guest natively want to do this, but maybe that's because it wasn't surfaced in the user experience before. I love it. Yes. So let's see.

Yeah. You give us the green light once you're ready. So your question again, if you can find me, I it'll help me go find what I'm looking for here. Drew, what was your question? Just the

this this kind of new credit market and how you think about mentally mapping it out and what players sit where. You mentioned like Alpaca and Dialectic and these sort these different, like in your mind Yes. My background is more in the payments space, so I'm kind of thinking about everything of who's involved with payments or custody and wallets. I haven't spent much time.

Something I'm actually genuinely very excited about doing the show and being in more conversations like this is to really learn more around the credit market and yield and Yeah. How yield generates.

Well, it feels like we just scratched the surface too because I know you mentioned in your booking too, like, Lotus USD, and this is starting with Bitcoin and Ethereum, and, like, we're just scratching the surface of these markets. And then then we go into layers of, like, QQQ. Everything else you could go down in the way of like how are we structuring

markets around those assets. Maybe WisdomTree is a good kind of anchoring thing to talk about with WTGXX. We had Will Peck on the show a couple months ago. Maybe that's a helpful how how you guys interface with them. What does that look like? Yeah. Let's get into that. Let me see if I can

share my I don't know if it's showing right now, the screen that I have open. Cool. Let me see. Let me kinda share. I think this is a good There you illustration of there we go. Why so customers stay as in the market? Again, you know, we are we need to form the markets first, and and that involves, you know, bringing in some of these professional firms that that we're still you know, we still see as long term customers. But, of course, these guys have a hurdle rate.

This is forming any kind of capital market that, you know, you have you need to have a certain amount of supply avail so you can have the borrowers of the size that you want to come in and and have the the liquidity available. Now we get that kinda going, you know, with rate sensitive borrowing. Again, that's some of those more institutional borrowers who are on chain. And then we have these kind of mandate bound vaults and some risk seeking junior opportunities.

Then Then we also kinda compound that with we have this really interesting intra market carry trade that develops that's gonna be a new thing that that different yield strategies you're gonna be pretty excited about because it it gives it real, you know, real material yield on holding a Bitcoin and adds some real material yield if you are holding wrap stake Death as collateral as well. So, you know, three and a half percent on Bitcoin, six and a half percent on wrap state DTH.

And that's basically running a carry where you come in, deposit collateral, you borrow from a more senior or less expensive zone of one of our markets, and then you'd lend that back out at a a riskier zone of our market. And then you kinda capture that spread. So we have a few things that sort of build that up, but then our longer term category, and I I promise I'll get back to WisdomTree in just a moment. So let me work backwards here, right to left.

So the the one of these categories is private credit, RWA, kind of alternative assets. And there's a lot of reasons why any any kind of a trantic protocol call, so even like a strata, there there's a couple others who are really focused on kind of more traditional senior, mez, junior, tranching. And some of them will do really well with some of these types of assets as well.

But for example, you know, Cicada is one who we're we're talking to about setting up some kind of pilot RWA markets that are able to apply that same tech that we have with Lotus to be able to kind of slice that up a little bit. And instead of slicing it up by liquidation under value, it's likely that we order the risk in those markets by withdrawal policy or kind of first right to withdraw if it's like a private credit fund.

And so lenders who are less worried about being able to withdraw would be our more junior lenders in that case. So that's one kind of area. Another one that I'm particularly excited about is and we'll be publishing an article here on X pretty soon called Settlement Beneath the Swarm. And it's sort of this whole thesis on machine finance and credit and kinda saying, look, every other liquidity primitive has found this natural path through you have one like a Uniswap, and then now you have a SushiSwap.

And then before too long, have an aggregator, and you have multiple AMMs. The aggregators are compressing price. But then you get these routers and solvers and intents. And so we've really laid, like, tremendous you know, I think about it like laying the railroad tracks Yep. During westward expansion where and the the telegraph lines where you just have this infrastructure that's that's outpacing the the people and the businesses that are soon to come because of it.

And that is just like crack for for any kind of agentic finance or machine directed flows. And so we've been thinking about that since the very beginning of building Lotus is making this really, really attractive for, you know, if there's a million agents out there comparing loans, that we're actually giving them a larger ontology to work with. We're giving them more heuristics.

So not just the rate right now, but actually giving them the rate, you know, rate history over time, the volatility of that rate, the risk rating, the probability of significant loss, all kinds of different endpoints and information that an agent can take in and say, actually, this is a better financing package than x y z. So we're really excited about that. We're doing everything we can to make ourselves visible and attractive to the machines. They're not here in, like, a huge, huge way just yet.

There's kind of a trust layer there. But we have a number of partners who are kinda signed in that that genre. And then we've also got a a landscape tool that we're gonna be launching, a free tool basically that allows comparison of rates across all of the different money markets on chain and then starts showing some of these different, what we believe, are other really important heroics that you need to look at when you're thinking about taking out a loan.

Truly, really, really cool. Would love to I mean, whoever's kind of behind the trippy orb or whatever you called it on the on the front end, like, the way that that's visualized is really helpful. I'm excited to see more ways that you guys come up with visualizing some of these things to to the non machine human viewers on your website, like me.

We need We to to bring some art as well, you know? You gotta have a little bit of art with all this.

You gotta make it beautiful. Data data can be beautiful. David, we gotta we gotta push pause here, and we'd love to have you back. If there's any, like honestly, the education, it seems like you Yeah. Love to have you back to educate folks on a specific topic. I feel like you your depth of knowledge and how you've even evolved your career from, like, the finance side of this really into more of a operator leader engineering. Like, there's so much you've probably learned in the last five plus years building this.

And if you you know, we're we're in the business of trying to help people wrap their heads around some of these concepts, so it could be fun to consider ways to, like, program some some of these topics out and and Yeah. Let's prepared with something else.

Don't know, David, if you've seen Shoutout Augustus CTQ or was that his name, Drew, that was doing Where Does the Yield Come From? Like, white box sessions. Yeah. Yeah. Augustin. Yeah. Maybe something like that on our on our next stream, and I'll probably shoot you a message about how we could how we could program that and, like, sit down and carve out, like, a proper hour of, hey. We're gonna deep dive.

Like, this is a this is a masterclass session on, like, tranching and structuring these products because I feel like twenty, thirty minutes doesn't doesn't doesn't give us enough time to actually I know, Claude. There's go deep here. So many other things just about Lotus that I'd love to talk about,

but there's aspects of it that I I love the idea, and I'd be happy to come on, and we can talk about whatever you guys want that's kinda tangential to to what we're working on. You know, we are forming up our pre deposit campaign in kinda mid August, and then we'll be looking at launch towards in September. So any other time you guys wanna get on and talk and Let's do it. I'll I'll do a little Lotus mention, and and then we'll educate the people. The people, guys. So, yeah, thank you so much for having me on.

I hope the rest of the show is great. Thanks, David. Good to meet you, Jack. Take care. Bye. See you, man.